Growth via mergers and acquisitions are on the mind of many small-to-medium business (SMB) executives these days, judging by their frequency. Since 2015, mergers and acquisitions have been happening at record-setting levels. The global value of M&A deals exceeded $3.6 trillion in 2017 - the fourth consecutive year to exceed $3 trillion. In fact, with nearly 50,000 deals announced worldwide, it was the strongest year for mergers and acquisitions since record-keeping began in 1980.
Companies merge for a variety of reasons―to diversify their product or service offerings, increase their reach into new markets, or to eliminate a competitor by joining them. Yet, the success of any merger is not guaranteed. In fact, the vast majority of mergers and acquisitions fail.
According to KPMG, only about a third of mergers in North America actually add value, while nearly 70 percent reduce the value of the merged companies, or are at best neutral. And chief among the reasons they fail, according to 17 percent of executives surveyed, was the failure to adequately address the issue of merging distinct, invested cultures.
Culture Matters During M&A
Mergers create greater value by combining assets. Typically this value is measured in terms of the dollar value of those assets. But when it comes to culture, there’s something more than monetary value to consider. In fact, unlike most assets that are easily measured and identified, such as number of employees, revenue, profits and the like, culture is not something that shows up on a balance sheet at all. It’s something that lives within the hearts of your employees.
I’ve written previously that culture is about what’s shared between and unifies the people who are part of an organization. Culture combines:
- Your organization’s mission. Companies that have similar or related missions will naturally have an easier time finding synergies that increase value.
- Your purpose. This is a combination of the values, beliefs, interpersonal relationships, focus, and other forces that drive your people and make them want to come into work every day. Some organizations, for instance, are very profit-driven, while others might be more customer-focused; some are very entrepreneurial and innovative, others are more risk-averse. Combining two companies with different values can create conflict, and this could reduce value if improperly handled.
- What you do. Who plays what roles? Do people trust one another? What are their work habits? What processes do they use? Processes and roles must be defined and trust established―either before or during the acquisition―so that the two organizations can work effectively together.
Misalignment and Plummeting Value
Failure to align cultures can jeopardize the value created by a merger or acquisition. That’s because even if two organizations share a similar mission or purpose, their values and how they accomplish the mission can vary widely. And when these aspects of culture aren’t aligned, it can render both companies less effective, less profitable, and their people far less happy.
And unlike other assets that might be combined during a merger, it’s very difficult to change or “liquidate” culture. Culture tends to linger post-merger for a couple of reasons. First, people within an organization often don’t recognize what it is about their culture that is unique; it’s difficult to change what you don’t understand. Second, culture is also about feelings, such as being part of something larger than the self. These feelings are subjective and therefore difficult to identify and change.
Five Best Practices to Successfully Merge Cultures
It’s difficult to recognize culture, let alone measure it, yet it is one of the most important assets your company has. So what is the best way to address these cultural challenges during a merger? Here are five best practices:
- Build from strength. If the object of a merger is to create value “greater than the sum of its parts,” then it stands to reason that both companies must identify the strengths that will add the most value to the organization after the merger. It’s crucial to ensure these are retained in the new organization. Strengths can be identified in a variety of ways, including employee/manager/customer surveys and interviews, and analyzing process flows to identify the roles and workflows within key departments of each company. The goal should be to identify what each organization does best, what motivates their people, how each organization operates, and in some instances, where those organizations need help.
- Identify culture champions. Often during a merger, the culture of the acquiring company is imposed on the company being acquired. Yet this approach fails to take into consideration the strengths that the acquired company may bring to the table. To combat this, culture champions from each organization should be appointed during the due diligence period to identify what makes each organization unique, in what ways they are similar, along with the strengths and weaknesses that each brings. This helps to identify synergies that can be applied to the merger.
- Envision the new company. Once the culture champions have done their jobs, a new list of strengths should be drawn up that combines the best aspects of both organizations―aspects that must be retained to create one great organization. Envisioning the future also includes processes: how can processes be improved or eliminated to make the new organization more efficient? Whenever significant change is identified, it’s important to understand how this might impact the culture of the combined organization. What relationships will change or where trust might need to be developed?
- Focus on employee impact. Often, the reason given for doing an acquisition is to provide value to external stakeholders (investors and customers). The impact on internal stakeholders (employees and management)is treated as a secondary concern. Yet, internal stakeholders will ultimately be the ones to determine if the merger is successful. When employee impact isn’t addressed, morale drops and the best employees head for the exit. To prevent this, companies must ensure that even if the merger ultimately leads to workforce reductions or changes to the organizational culture, the environment for workers who remain is positive.
- Put culture at the center of change management. Change management is an important part of a successful merger, but many organizations tend to think of it in terms of communication - making sure everyone knows “what” is happening. When culture is at the center of change, the “why” and the “how” should be equally important. Why is this merger happening? What are the goals? How will employees be affected? How will positive aspects of culture be maintained and integrated across the new organization?
Acquisitions have the potential to be of benefit not just to shareholders but also to employees and other internal stakeholders of both organizations. However, to reap those benefits, culture cannot be an afterthought. Companies must put the culture merger at the top of their acquisition to-do list.
We’re looking for contributors for a new book “Beyond the Plateau Effect.” If you can answer the question, “What role does culture play in your success?” visit our website to share your story. We would love to hear from you.